Global markets are trying to pick up the pieces after a torrid Tuesday, following the nasty surprise in the latest US inflation report. The higher-than-expected CPI print nullified premature hopes for a “dovish pivot” by the Fed in the second quarter of next year, wrong-footing risk assets while reasserting king dollar’s dominance.
The S&P 500 erased all of its month-to-date gains in one fell swoop, posting its largest single-day drop since June 2020, though US futures are edging higher on Wednesday. At the time of writing, gold remains rooted near the $1700 floor, oil prices are extending Tuesday’s declines, while EURUSD is still cowering below parity.
Markets have been jolted by the realisation that inflation could stay persistently elevated for an extended period, forcing the Fed to persist with more supersized rate hikes. Fed Funds futures duly raised the forecasted peak in this ongoing rate-hike cycle by 30 basis points to 4.3% by March 2023. There’s even now a 35% chance being allocated for a gargantuan 100-basis point hike by the Fed next week.
As long as the FOMC has more runaway before reaching “peak hawkishness”, risk assets are unlikely to garner significant gains in the interim, while sanctioning king dollar’s iron grip across the FX universe.
